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Do employees lose their bonuses when sacked?

July 13, 2018

The recent claim against the AA by its former executive chairman for £225m looks certain to raise interesting issues relating to sacked employees’ bonus and long-term incentive share entitlements. In this blog, I look at the law relating to employee bonuses and long-term share incentive schemes.

AA executive chairman Bob Mackenzie was dismissed for gross misconduct in July last year after what the company described as a “sustained and violent assault” on a colleague. His attack on a fellow executive in a hotel bar in Surrey was caught on CCTV, so you would think that this is an open and shut case if ever there was one.

Not quite. Mr Mackenzie is believed to have made an Employment Tribunal claim against the AA on the basis that his dismissal was carried out in breach of company procedure; he is not disputing the fact that the assault took place. However, he is alleging that it was stress related, which he attributes to his employer’s conduct. The AA is said to be “astonished” by his claim.

I have no knowledge of whether the AA followed its procedures or to what extent stress was a contributing factor to the altercation that took place. It seems clear though that Mr Mackenzie’s claim is about much more than a dismissal with a loss of earnings claim (important as this is).

The reason for the claim is due to two things:

The AA is attempting to claw back bonuses of more than £1.2m from Mr Mackenzie, which he is resisting.

Mr Mackenzie has also brought a breach of contract claim against the AA for a whopping £225m, based on what he says is a long-term share incentive scheme entitlement.

The known facts in the case are insufficient to speculate about who may win, but it is worth looking at the law relating to bonuses and long-term incentive schemes all the same.

The law relating to employee bonuses and long-term incentive share entitlement

As a general starting point, employee bonuses are used by companies to reward good performance and promote loyalty. This is why many employee bonuses are not payable if you are on notice during the bonus payment date and (as in this case), where there is a dismissal for gross misconduct.

The same can apply in long-term incentive share entitlement schemes, where again options are used by companies to promote loyalty and reward good performance.

The provisions for non – payment under these schemes can be very flexible, depending on the relevant terms. For example, payment can be refused if you are a “bad leaver,” as opposed to a “good leaver.” A good leaver is usually someone who is retiring, being made redundant, or being prevented from working because of disability or death. An employee leaving in any other circumstances can be a considered a “bad leaver” and not entitled to any payment.

Bonus calculations

Bonuses, in particular, can be either contractual or non-contractual although the distinction is not as clear as may first appear.

Below are some relevant legal issues when considering in particular your entitlements to a bonus which can also in some cases apply under an incentive scheme.

Discretionary bonus. Employee bonuses are commonly expressed as being discretionary and often set out criteria such as team or individual performances. This can lead to disputes, as there is no contractual entitlement for the employee to receive the bonus. Employees may claim that their employer has unfairly failed to pay them a bonus or paid them less than they were entitled to receive. And, it does not end there. Where there is discretion about whether a bonus is to be paid or shares awarded, this discretion must not be exercised by the employer in an arbitrary, capricious or irrational way. The employer must comply with the implied term of mutual trust and confidence and treat all employees “even handedly”.

Contractual bonus. This is better from an employee’s perspective as the employee has a contractual entitlement to receive the payment based on defined criteria. These provisions, although in my experience rare, lead to fewer disputes as the employer has no “wriggle room” not to pay. Failure to pay can give rise to a claim for breach of contract and possibly constructive dismissal, too. Sometimes, bonuses are contractual but with a discretionary element, i.e. a hybrid of the two. This is more complex, but at the same time more common. Although the employer is contractually committed to pay the bonus, they can exercise their discretion on the amount they pay. The discretionary test in this instance, (known as a partial and not absolute discretion), is not unfettered and any decision-making process must be rational and non-perverse.

Bonus payable by custom and practice. If a bonus has always been paid in certain circumstances, it can be implied that the employee has an entitlement to a bonus. Effectively, the obligation to pay a bonus is implied into the employee’s contract.

Bonuses and termination of employment. It is more common now to include clawback provisions in certain bonus payments, as in the AA case it seems, where a bonus has to be paid back by the employee, based on any future misconduct, i.e. in this case dismissal for breach of contract.

So, if the employee has been dismissed for gross misconduct, they will be in breach of contract and cannot rely on their contract to enforce their bonus entitlement. In brief, you cannot seek to enforce a contract you yourself have breached.

This would appear to be the position in the AA case. However, (and this is what Mr Mackenzie is banking on), if the dismissal is unfair and in breach of contract because the correct procedure has not been carried out (and/or because Mr Mackenzie asserts that his actions were as a result of the stress brought on by his employers), he will have a potential claim for loss suffered as a result of the dismissal, including lost bonuses and options.

The relevance of the date of your dismissal. Most bonuses require the employee to still be an employee at the bonus payment date. What happens though if an employer dismisses an employee before the bonus payment date?

In this situation, an employee will either be required to work out their notice period, placed on garden leave or receive a payment in lieu of notice (known as ‘PILON’, for short).

PILONs

If the employee is on notice or garden leave, the first critical question is: does the employment contract specify that the employee loses their bonus if they are working out their notice at the bonus payment date? If yes – no bonus. If not, the next question is whether the employee is still an employee on the bonus payment date?

If they are working out their notice or on garden leave, the likelihood is that the employee is entitled to their bonus. In the absence of any express provision asserting otherwise, the courts usually err on the side of the employee in these situations and say they are still employed.

If, however, the employer is able to rely on a validly drafted PILON clause and pays the employee before the bonus payment date, the employee will not be employed on the relevant date and will lose their bonus.

You may not be surprised to hear that unscrupulous employers have been known to use PILON clauses to avoid paying large bonuses.

If there is no PILON clause and the employer tries to pay the employee in lieu of notice, the employee would be able to claim breach of contract and seek payment of their bonus.

What all these situations emphasise is the importance of you having your employment contract properly drafted, especially if it contains bonus provisions. And, if you are dismissed, make sure you take legal advice, because the bonus you thought was lost may not be lost after all. Not only that, there may be further entitlements you were not aware of under your incentive schemes.

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